Great Trades

Monday, March 08, 2010

Pullback time?

Our last blog update was in December, when the VIX first broke below 20 support, spurring a S&P 500 breakout to the 1150 area in January:

If the VIX continues lower to establish a new range and the S&P 500 can break out above 1120 resistance, that would be bullish for the stock market in the short term, especially during this seasonally strong time of the year. However, the last time the VIX broke below 20 support, in August 2008, the short-term rally was followed by the precipitous market decline into the fall. Also, January has featured sharp declines in each of the last 2 years. Given the recent market action, it looks most likely that the S&P 500 will finally be able to break through 1120 resistance (perhaps after a very short-term pullback) and spurt higher in a short-term rally as the VIX establishes a new range. Depending on the market action, such a rally could prove to be a selling opportunity, judging from the last couple of years.

As expected, the rally in January was a selling opportunity, followed by a sharp decline of over 100 S&P 500 points. The sharp decline into February proved to be a buying opportunity, featuring a VIX spike over 29, outside its upper Bollinger Band.

Since the February low, the S&P 500 has rallied back strongly, pushing the VIX back down to the 17's, the same area as the January low, which corresponded with the high in the S&P 500 in the 1150's. Again, the market spurted higher once the VIX broke below 20 support.

Now, for the first time since September, the TICK 10-day EMA is back above 600 again, and a number of other indicators are at short-term overbought extremes. The previous 10 times this EMA has peaked over 600 in the past year, the market has had a short-term pullback. Every one of those pullbacks has proven to be a buying opportunity, followed by new highs in the S&P 500.

If recent history repeats itself, we should soon see a short-term pullback, which should be followed by new highs in the S&P 500. However, a break of 20 resistance in the VIX could again spur a sharper pullback in the market. If the pattern of higher highs in the S&P 500 is broken this time, the market could be in for more than just a short-term pullback.

Considering the longer-term trend higher in gold in its powerful bull market, this pullback should prove to be a great buying opportunity for longer term, for gold and silver as well as quality mining stocks.

Indeed, the precious metals pullback in December proved to be a great buying opportunity, as did the February pullback. We continue to view all pullbacks in precious metals and quality mining stocks as buying opportunities in a powerful bull market.

As we've mentioned before, our blog updates will continue to be less frequent than previously, as we focus on expanding, updating, and testing our automated futures trading system across different markets, different timeframes, and various conditions.

Disclaimer: Great Trades may have a position in all or some of the stocks discussed in this blog, but is not paid by any company to promote their stock.
Great Trades contains opinions, none of which constitute a recommendation that any particular security, transaction, or investment strategy is suitable
for any specific person. Great Trades does not provide personalized investment advice.